The Latest in Global Money Printing


Welcome to the When Money Destroys Nations newsletter covering money printing trends, hyperinflation storm warnings, monetary system transition, the decline of dollar supremacy, cryptocurrency, and precious metal trends.

We are coming off a great first two months of the launch of our book, When Money Destroys Nations. Globally, money printing is becoming a serious consideration for most countries that are indebted and Zimbabwe’s lesson has never been more applicable.

You’re part of a growing group of people steadily educating themselves about the real consequences of money printing and how the global monetary system is evolving with each passing day. We won’t spam you. If something big is happening that we think you should know about, we’ll let you know, but normally we’ll only send around one or two emails per month. We welcome your feedback and questions – tell us what you want to know about in the fascinating world of money printing and monetary systems. And remember, if you find it’s not for you, you can unsubscribe from the mailing list quickly and easily at the bottom of this email.

Japan goes over the money printing hill
In the last month, Japan announced an increase to its money program – printing money at a rate of ¥80 trillion per year. To put this into context, that is over ¥620 000 ($5 300) printed per person in Japan every year!  If only life were as simple as printing money whenever we needed it.

The ridiculous aspect of these statistics are that the newly created money doesn’t go to the population. This money goes to special interest groups in the finance sector – but mostly, it goes to paying off the debts of the Japanese government. You and I work hard for every dollar, rand or yen we make and these guys go ahead and create it out of nothing. Tragically, the largest holder of Japanese debts are pensioners – people who have saved hard all their lives only to receive money created out of nothing in return. In Zimbabwe, pensioners who had saved lost everything. Interview after interview, I heard the most heart-breaking stories of how pensioners suffered.

Bank of Japan’s governor Haruhiko Kuroda has ominously said that he wants to double the amount of Japanese money in circulation in the next two years. I wonder what goes through his mind as he sleeps at night.  With newly printed money, the Bank of Japan and the Japanese government can purchase real goods and services whilst passing on the cost of this to the poor and to pensioners who diligently save all their lives.  The reality is that nothing comes for free. And someone has to pay for these huge scale money printing programs. Sensing the problems this will create, Japan’s government pension fund that manages the retirement money of millions of government employees, announced that it will begin selling hundreds of billions of yen worth of government bonds and buying stocks. When the government doesn’t trust its own bonds, you know debts are unrepayable.

Japan’s problems are only starting. With debts of over ¥1 100 000 000 000 000 (¥1.1 quadrillion), the Japanese government has few options available to it.  Add to that social security obligations of over ¥1 quadrillion, and the equivalent net amount owed per citizen is ¥15 million ($133,000) each, or nearly half a million US dollars’ worth of debt per family.

Japan is on a path very similar to what happened in Zimbabwe. Watch this space. The economics of money printing cannot be denied.

The Swiss and their Love of Sound Money: Why the “Save Our Swiss Gold” referendum is important
On the 30 November, the Swiss public are voting on a referendum known as the Save Our Swiss Gold initiative. The referendum is looking to require the Swiss National Bank to hold gold equivalent to a minimum of 20% of the base currency in circulation. The Swiss National Bank would also need to repatriate its gold holdings from other countries over five years and be restricted from selling its gold going forward. Here are three high level reasons why the Swiss referendum on gold is important.

Firstly, this signals a major shift in the global approach to reserve currencies. This is the first time in decades that a major economy is seriously investigating providing a gold backing to its currency, albeit only 20% of bank reserves.  It nonetheless would signal a move away from US dollars and euros as a reserve currencies, and provides an interesting insight into the potential movement of other currencies in this direction.

Secondly, the Swiss are concerned that other central banks may not be as reliable at keeping its gold compared to the Swiss National Bank and would look to repatriate about 300 tons of gold from foreign central banks. This past week, the Dutch central bank repatriated over 122 tons of gold from the vaults of the Fed in New York. Germany is in process of doing the same, repatriating up to 50 tons a year. On Monday, French opposition leader (and potential next president of the country), Marine le Pen demanded that France repatriate its gold as well. There is ample evidence to suggest that there is less gold in the major central bank vaults than is reported and mass redemptions of gold could cause others to do the same – sparking a similar gold run as was seen in 1971 with the collapse of the Bretton Woods financial system.

Third, for the Swiss National Bank to fulfil the mandate of the referendum, it would need to purchase at current prices over 1600 tons of gold. However the SNB would have 5 years to implement the gold target. Assuming 5% quarterly growth in the base money, and all other things held constant the central bank would need to purchase approximately 1000 tons per year for the next 5 years. This represents a major increase in demand for gold – about 25% of total annual global demand. This could cause an increase in the price of gold and may encourage other central banks to consider doing the same.

What could this mean for gold?
A yes-vote could cause an increase in the price of gold, whilst a no-vote would likely not impact the gold price significantly. For those who have appetite for exposure to the gold price, a yes-vote would be a welcome development.

Even if the referendum passed a yes-vote the central bank would still be able to print money to purchase its gold and euros – giving it the ability to maintain the currency peg and to maintain the requirements of the referendum. The referendum would therefore be unlikely to affect the exchange rate value of the Swiss franc.

The latest polls are leaning in the direction of a no-vote, but we are certainly not ruling out the possibility of a yes vote come Sunday 30 November.

More to come
That’s all for this edition, but the global money printing news is coming on thick and fast these days so there will no doubt be a lot to talk about next time. We’ll cover other aspects of money printing in our next few emails – including what’s happening in the US, Europe, Venezuela and other countries.  Like I said earlier watch this space. As countries around the world are printing money, it will have very real consequences on you and I and we all need to be prepared for major shifts in economies and in how commerce is done.

One of the questions we get a lot is: how should we respond to money printing? It’s a great question since it personalises all these theories. We’ll look to answer these questions and more in forthcoming editions. We’d love to hear from you – let us know what other questions you have.

Visit our new and improved website where you can sign up for our monthly newsletter and check out our latest articles, interviews, recommended reading and where to buy the book.  We as authors are passionate about the topic of money printing and what it means for you, and are available to speak with your companies, book clubs and societies. Let us know how we can engage with you on this.

Best regards

Philip Haslam
Author, When Money Destroys Nations

Why Zero Interest Rates Can Never Work

ZIRPWhen the central bank meets to decide on the level of interest rates, most people care about only one thing: are my home loan, car and credit card repayments going up, down or staying the same? Although this is no trivial concern given the importance of managing a household budget, such a limited view does scant justice to the broad, critical and complex role interest rates play in an economy.

The usual narrative is that low rates are good and high rates are bad. But the real problem is not “high” interest rates, but wrong interest rates. You see, interest rates are prices. Like the price of a soda drink is agreed between seller and buyer, so interest rates are the price of loans agreed between lender and borrower.

Suppose the government forced the price of sodas to half their market level, jailing anyone caught selling them at any price above this new level. What happens? Soda lovers flock to the stores to buy soda. Soda makers, by contrast, make heavy losses and either close down or find some way to make cheap and nasty soda for half the original cost. The supply of soda plummets, while the quality of soda freefalls.

Paradoxically, setting a price artificially low makes a product easy to buy for a while, but eventually impossible to buy at all. Interest rates in most modern economies work the same way. The central bank forces this price to a desired level through extensive regulatory control over the banking system, relying on the fact that the money it creates is the only legally permissible money used in trade. When the central bank forces interest rates too low, borrowers think life is great. Houses, cars, and furniture seem cheap and starting a business with a loan is easy. Except that discerning lenders don’t see much point in lending any more, because they are no longer adequately compensated for their costs and risk. Not only do loans from these lenders dry up, but the quality of remaining loans falls.

How does the quality of loans fall? Just like the soda makers who sourced cheap and nasty materials, so credit providers (banks) move away from sourcing funds from discerning investors who would charge more, and rely instead on getting cheap money directly from the central bank, which prints it out of thin air and lends it to the bank at the cheap rate.

With this cheap funding, the banks don’t have to be nearly as careful who they lend to and can happily accept lower interest repayments from borrowers. Risky borrowers who were unable to pay the rate of interest discerning lenders demanded can now access cheap loans. Furthermore, because the loans created out of thin air look exactly like the money in the hands of discerning lenders, this poor quality is veiled and people are fooled into thinking that discerning lenders are supplying loans, when in fact they’re running for the hills.

This ends in disaster. Borrowers get into too much debt and the money loaned out of thin air floods into the economy. New money in  people’s hands causes the economy to consume more than it produces and the result is a gaping and unsustainable trade deficit. The new flood of money pushes prices up and causes the currency to weaken.

After initially feeling flush, people realise they are not as well off as they thought as price increases eat into their real living standards. Forced to rein in inflation before it destroys everyone’s living standards, the central bank hikes interest rates to entice the discerning lenders to do more lending. Businesses addicted to cheap loans find their input and funding costs rising unexpectedly, damaging profitability.

The return of discerning funding is critical for sustainable economic growth, because it funds productive capital investments that yield the highest return, creating jobs and quality, affordable products. Meanwhile, higher interest rates punish those who gorged on artificially cheap credit, restoring the economy to healthy reality and balance.

The next time the central bank meets to decide on the level of interest rates, don’t just ask how much your home loan payments are going to cost next month. Also ask: are interest rates at the right level to foster sustainable economic progress, and might I be living an illusion?